Banks put off by cost of student loans Banks' fears delay student loan reform

The Government's plans to privatise student loans are to be delayed until after the general election in the face of opposition from the banks, it emerged yesterday.

Cuts in other areas of education might have to be made after the embarrassing postponement of proposals which would have saved the Treasury pounds 100m in their first year. Ministers hoped that the banks would take on much of the cost of the loans, but several expressed doubts about their commercial viability. The Midland said it would not be taking part.

The announcement came as students faced an increasing possibility that they might have to pay top-up fees. Cuts to university funding announced in the Budget will mean that universities' capital spending will go down by more than 50 per cent in three years, the Higher Education Funding Council said last night. At the same time grant and fee income will be reduced by 12 per cent.

The council has offered incentives to universities to cut student numbers and announced that it is reviewing plans to fund the development of libraries and computer networks.

At a meeting next month, some vice-chancellors will argue that under such financial pressure they have no alternative but to charge top-up fees.

Another, less radical alternative would be to press for a system under which students would receive loans for both maintenance and fees. So far politicians in both major parties have resisted such proposals but with loans worth pounds 1bn outstanding the pressure for change is growing.

Yesterday Eric Forth, the higher education minister, told a Commons committee on the Student Loans Bill that he had decided to delay the reforms for a year despite arguing against such a move only two days earlier when Labour proposed it.

"Following our discussions with the banks, we have decided to defer the implementation date of the loans scheme from October 1996 to October 1997. Considerable changes to their information technology systems ... and the considerable merger activity taking place ... would make it difficult for them to meet the tight deadline that we envisaged," he said.

A similar scheme proposed five years ago when student loans were first introduced collapsed because the banks pulled out. The current system is administered by the private Student Loans Company but is funded by the Treasury.

Bryan Davies, Labour's higher education spokesman, said ministers should never have gone ahead with legislation until it had the banks' support. Jim Murphy, president of the National Union of Students, also welcomed the news.